On 22 April 2001 the Claimant, an unemployed drug addict of no fixed abode, who had previously served a prison sentence for robbery, was the front seat passenger in a car which collided with a stationary van. The Claimant sustained severe head injuries in the collision. The driver of the vehicle, the First Defendant, was uninsured, and accordingly the Motor Insurers’ Bureau became involved in the claim.

The main issues in relation to the claim concerned the Claimant’s contributory negligence, since he was not wearing a seatbelt, and the value of the claim, bearing in mind the effect of his previous drug use. A Litigation Friend, the Claimant’s sister, was appointed at the end of March 2004, and the claim was issued in April 2004. The Second Defendant conceded liability on 6 January 2005 and judgment for damages to be assessed was entered on 21 March 2005. The claim was ultimately settled by consent for the sum of £1 million on 25 June 2007. The Defendants were ordered to pay the Claimant’s reasonable costs, to be assessed if not agreed.

The litigation was funded under The Accident Group (TAG) scheme. The Claimant entered into a conditional fee agreement (CFA) with his solicitors on 20 July 2001. Following the judgment in English v Clipson, dated 5 August 2002 (in which District Judge Wharton decided that the requirements of the Conditional Fee Agreements Regulations 2000 could not be met by delegating the task of giving the relevant information to the client to a TAG representative), some time between 1 September 2002 and 4 December 2002 the Claimant signed a second CFA. The Claimant’s solicitor Mr McMullan first met the Claimant and his sister, who later became the Litigation Friend, on 28 January 2003, all previous contact had been by telephone and letter. A conference with counsel was arranged for 4 February 2004, when counsel advised that the Claimant needed to have a Litigation Friend. Shortly after that, on 9 March 2004, the Claimant’s general practitioner certified that he was incapable of managing his own affairs because of permanent mental disability. Mrs Findley Clarke was subsequently appointed the Claimant’s Litigation Friend.

This sequence of events led the Second Defendant to raise a number of issues as to the validity of the two CFAs, the capacity of the Claimant and sundry subsidiary issues.

The issues fall into five main headings namely:

the conditional fee agreement dated 20 July 2001;

capacity;

the letter of 4 May 2006;

the second conditional fee agreement;

the indemnity principle and the legal expenses insurance (LEI) policy.

The issues, which have been agreed between the parties, are in the following terms:

The TAG scheme was examined by me in some detail when dealing with the issue of delegation to TAG representatives of the solicitor’s duties under the CFA Regulations 2000 (judgment dated 27 November 2002), and dealing with premium issues (judgment dated 15 May 2003), and also swing premium (judgment dated 30 July 2003). My decision in respect of the delegation issue was upheld by the Court of Appeal in Hollins v Russell & Other Appeals [2003] EWCA Civ 718, and in respect of the premium issues in Sharratt v London Central Bus Co Ltd (No.2) [2004] EWCA Civ 575.

My judgment of 27 November 2002 set out, at paragraphs 11 to 16, the statutory framework governing CFAs, and I do not propose to repeat it here.

The Statutory Objective of the Courts and Legal Services Act 1990 is set out at Section 17(1):

In my judgment of 15 May 2003 the TAG contractual framework is fully set out at paragraphs 16 to 80. In this case that framework is essentially unchanged.

TAG went into administration in May 2003.

So far as relevant, the provisions of Regulation 4 of the Conditional Fee Agreements Regulations 2000 are as follows:

I deal with this in more detail below, but, put shortly, the Second Defendant’s position is:

That the first CFA is unenforceable.

That no second CFA was entered into, or, if it was, that the second CFA is unenforceable.

In the event that the second CFA is found to have been entered into, that nothing is payable under the first CFA in any event, whether it is enforceable or not.

That in any event the retainer with the Claimant, whether under the first or second CFA, determined as a result of his lack of capacity on a date to be decided by the court.

That there is no, or only a limited, liability for costs up to the date the retainer was determined.

That there was no retainer with the Litigation Friend thereafter. Alternatively, any such retainer was an unenforceable CFA.

That in any event any liability for disbursements cannot exceed a maximum of £50,000 (the limit of indemnity under the ATE policy).

The Claimant’s position is that:

The solicitors complied with Regulation 4(2)(e).

If there was a breach it was not material.

If the first CFA is enforceable, the second CFA is of no effect.

If the first CFA is unenforceable, the second CFA is enforceable.

At the time of the second CFA there was a binding contract of ATE insurance and Regulation 4(2)(e) did not apply.

If Regulation 4(2)(e) did apply, the solicitors nevertheless provided the necessary information, both orally and in writing.

If the information regarding the solicitors’ interest in the TAG policy was not properly provided, that failure would not be material because that information would have been of little value to the Claimant, who by then already had ATE insurance.

When Mrs Findley Clarke became Litigation Friend she had the authority to, and did, affirm or ratify the CFA between the Claimant and his solicitors.

If both CFAs are unenforceable the Claimant is nevertheless entitled to recover the costs of his disbursements and counsel’s fees for which he took out a loan.

In support of the Claimant’s proposition, Mr Power relied on the evidence of James McMullan (the Claimant’s solicitor), John Hesketh (an assistant solicitor with the firm at the time) and Daniel Downes (an assistant solicitor with the firm at the time). Mr McMullan and Mr Hesketh were cross-examined. The Second Defendant did not call any evidence.

Mr McMullan explained that he had joined the Panel of Accident Group Solicitors in 2000, although the exhibited Panel Agreement is dated May 2001, he was at first “quite hesitant and apprehensive” and agreed to take no more than ten cases a month initially. His practice was to read through the cases which were sent to him, and weed out those cases which he thought had no prospect of success. This would leave him with something between 8 and 15 possible cases out of the 20 to 25 that were sent to him. He explained:

Mr McMullan was a member of The Association of Personal Injury Lawyers (APIL) and in particular the “Costs and Funding” and “Procedure” special interest groups. Between 1994 and 2002 he regularly attended group meetings where speakers gave useful updates concerning this area of personal injury practice. He exhibited his professional development (CPD) record over the years, which bore out what he was saying. One of the talks which he attended was given by Gordon Exall, a barrister specialising in personal injury work, who was also a member of APIL. His talk was specifically on the issue of the Conditional Fee Agreement Regulations 2000. Mr Exall provided those attending with a check list setting out the advice which had to be given to clients in order to comply with the Regulations. Mr McMullan used this check list for his practice, both at the time and up until it was replaced by an updated version. Mr McMullan no longer has the earlier version of the check list. Mr McMullan “took on board the advice given by APIL” and where possible implemented their best practice advice in his firm.

On 13 July 2001 Mr McMullan, having received from TAG the case of Lindsey Findley, telephoned him. He recorded a brief attendance note, which it is worth setting out in full:

In his witness statement Mr McMullan explained that he had telephoned the client to get more information. He (the client) was able to tell Mr McMullan about the accident, but when it came to the explanation that the case had been passed to the solicitors through TAG, and the advice about the funding arrangement, he did not seem to understand what Mr McMullan was saying. Mr McMullan continued:

This attendance lasted 24 minutes and Mr McMullan described it as a lengthy conversation. He said he was able to assess the Claimant’s ability to give him instructions and his mental capacity generally. He formed the view that Mr Findley had sufficient capacity to understand what the case was all about and to give instructions. He was capable of holding a conversation and answering questions. Mr McMullan thought he had spoken to Joy Findley Clarke, the Claimant’s sister, at an early stage to find out what she knew about the insurance position concerning the vehicle in which her brother had been travelling. He thought this was about 13 July 2001. In his view, if she had thought Lindsey Findley was incapable of dealing with his solicitor she would certainly have said so.

With reference to his comments in the attendance note of 13 July 2001 Mr McMullan said that when he met the Claimant subsequently he felt he had not done justice to him, since he was able to hold a conversation and told Mr McMullan his history as a market trader. He was able to give instructions. Mr McMullan has a diploma in dealing with elderly clients and suggested that he had considerable experience in dealing with clients with impaired mental ability. He agreed that, with the benefit of hindsight, the Claimant did require a Litigation Friend. He and Counsel had been concerned because of the Claimant’s continued drug use.

Under the TAG Scheme, a TAG representative would call at the client’s home with two full sets of documents, namely the client care letter, conditional fee agreement, fact find and oral explanation sheet and documentation in respect of the after the event legal expenses insurance policy. All these documents were TAG documents. Under the TAG Scheme no success fee is charged in the CFA. The representative, in this case Sarah Nicholls, would take the client through the documentation using the fact find and oral explanation sheet. It is known that this visit took place at the home of Joy Findley Clarke, where Lindsey Findley was living following the accident, the date was 20 July 2001. TAG having gone into liquidation, it has not been possible to contact Sarah Nicholls, and there is therefore no direct evidence of what took place on that day.

The fact find and oral explanation sheet was signed by Lindsey Findley on 25 July 2001 (bundle tab 4, page 353). The answers to the fact find questions indicate that: the client does not have the benefit of legal expenses insurance which would cover his own costs, third party costs, or both sides costs; nor does he have insurance attached to any motor policy. He is not a member of a trade union which would provide funding. He is said to understand that the information and explanation is obtained and given on behalf of the panel solicitor and is happy to proceed on the basis that if he has in fact other legal expenses insurance cover in relation to the claim, then it may affect his prospects of recovering the premium for the policy and may be deducted from his damages. The oral explanation states as its final paragraph:

At the end of the document Sarah Nicholls confirms:

For his part the Claimant signed confirming:

In relation to the conditional fee check list, which is Mr McMullan’s own document, and which bears the Claimant’s signature and the date 20 July 2001, Mr McMullan explained that this is a document similar to the one that he would have had in front of him when speaking to the Claimant on the telephone on 13 July 2001, when he would have gone through the information with him. He stated that the check list does not spell out exactly everything he would have said to him, but would have prompted him about all the matters which he had to discuss. The discussion itself would have gone into greater detail.

Point 6 of the check list (bundle tab 4, page 356) states:

In relation to this Mr McMullan states in his witness statement:

Although Mr McMullan was at the time a member of The Accident Line Protect Scheme, he said he would not have discussed other ATE policies with the Claimant, because he was being handled under the TAG Scheme. The Claimant was aware that he was a panel member, and that his case had been referred to the solicitors.

With regard to the £50,000 limit of cover on the TAG policy, described in the letter to the client of 18 July 2001, McMullan thought that £50,000 was more than enough. The purpose of the policy was to protect the client so that he would not have to pay out if he lost. Mr Mallalieu suggested that £50,000 was simply not sufficient to cover the Claimant’s own disbursements and counsel’s fees, his opponent’s costs, the policy premium and any applicable loan interest. Mr Mallalieu pointed out that the Claimant’s own disbursements, including VAT, amounted to £112,583.35. Mr McMullan said that had he thought it necessary he could have increased the level of cover, but he had obtained an informal admission of liability, and on 31 January 2005 obtained judgment on liability. The Claimant’s risk, therefore, was limited to failing to beat any offer which might be made. The Defendant would in any event be liable for costs up until 31 January 2005. Mr McMullan stated that he always told the Claimant of any disbursements which were to be incurred.

Mr McMullan wrote to the Claimant a letter dated 13 July 2001 (bundle tab 2, page 132):

In cross examination Mr McMullan said that his normal practice was to include with the TAG documentation a copy of his own check list.

In his supplemental witness statement, dated 23 October 2008, Mr McMullan stated that he dictated the letter of 13 July 2001 on that date but that it may not have been posted on that date because a second client care letter was sent dated 18 July 2001. Both letters were prescribed TAG letters. It was Mr McMullan’s practice to send two copies of the TAG documentation to the client, one for the client to sign and return after being visited by the TAG representative and other for the client to keep. The documentation sent consisted of the client care letter, conditional fee agreement (terms and conditions), the fact find and oral explanation sheet and the conditional fee check list.

The client care letter of 18 July 2001 (bundle tab 2, page 133) runs to three pages, plus a further nine pages setting out the conditional fee agreement itself. In the letter the Claimant was told that the solicitors’ charging rate was £175 per hour. The letter continues:

At the end of the letter Mr McMullan, on behalf of his firm, confirmed that:

The matters in paragraphs (a) and (e) under “other points” are:

Under Schedule 2 the agreement states:

The client care letter is also signed by the Claimant, who is informed:

The date beside both signatures is 20 July 2001.

The conditional fee check list (bundle tab 4, page 356) although bearing the date 20 July 2001 (see paragraph 24 above) was in fact signed by the Claimant on 20 January 2003. Mr McMullan had travelled to Wolverhampton and attended upon the Claimant and his sister in order to take further detailed instructions. He explained again how the CFA scheme worked with the linked ATE policy and went through the Regulation 4 check list again. Neither the Claimant nor his sister had any questions about the CFA retainer, and both were satisfied with it. Mr McMullan continued:

Mr McMullan explained that he did not rely solely on the TAG representative to give the necessary explanation. He described himself as a generally cautious person and had followed the best practice advice given by APIL using the check list which was not a TAG document.

Dealing with his attendance note of 13 July 2001, Mr McMullan thought he might not have given the client sufficient credit as to the level of his understanding:

The Claimant’s file was then passed to an assistant solicitor John Hesketh, who dealt with the matter under Mr McMullan’s supervision. Following the decision in English v Clipson Mr McMullan instructed his fee earners to get out all their TAG files and contact every client as soon as possible to go through the oral and written advice requirements and the CFA Regulations 2000:

Although Mr McMullan understood Mr Hesketh to have carried out this instruction, the relevant papers can no longer be found. Mr Hesketh left the firm in December 2002 and Mr McMullan resumed conduct of the matter. In his attendance note of 4 December 2002 he notes that the Claimant had “re-signed CFA re English v Clipson”. Before the CFAs were re-signed the fee earners were required to give the Regulation 4 oral advice over the telephone. Mr Hesketh had been instructed to use a check list similar to the one produced in the case of R Hull (which was exhibited as an example), which was signed on 29 October 2002. Mr McMullan believed that the Claimant signed another CFA in or about September 2002.

The purpose of the second CFA was so that if the first CFA was found to be unenforceable, the new CFA would be effective from the date it was signed. Mr Mallalieu pointed out to Mr McMullan that in the bill lodged for assessment, which had been signed by him with a certificate of accuracy, no mention was made of the second CFA. This was, he said, because his firm relied on the first CFA being accurate. The Second Defendant’s Points of Dispute requested full details of the Claimant’s retainer, and any variation. The Claimant’s Replies to the Points of Dispute, dated 4 December 2007 and signed by Mr McMullan, again made no mention of the second CFA. Mr McMullan stated he thought it would complicate the matter to mention it, since his primary case was that the first CFA was valid.

The check-list signed by the client in respect of the second CFA was in virtually the same wording as that signed in respect of the first CFA. Mr McMullan felt that this gave the client sufficient information to comply with the Regulations. One feature of the check-list was to show that the solicitor was giving advice to the client and not the TAG representative. The client was again told by letter (in the case of Mr Hull, dated 24 September 2002, bundle tab 4, page 411):

Mr McMullan had drafted this letter, and his staff were required to use the letter in respect of all TAG files, so that a CFA could be re-signed. Towards the beginning of the letter there is a paragraph in bold type:

Mr McMullan confirmed that the second CFA signed by the Claimant would have been in the same terms as the original CFA. The firm was aware of inconsistencies between what was said in the TAG documents and the advice which they gave to the their clients, they therefore had to have something signed by the client, since they were not allowed to change the CFA. The signed check-list was intended to show that the client had received the Regulation 4 advice before the agreement was signed.

Mr McMullan accepted that if the first CFA was unenforceable, the firm would have to bear that loss. He did not suggest that the second CFA was retrospective. Under the second CFA the client is told that he is liable to pay from the date of the agreement. He accepted that the client had not been told of the effect of the two agreements on each other.

On 28 January 2003 Mr McMullan visited the Claimant and his sister at the home in Wolverhampton. He subsequently prepared a full attendance note (bundle tab 4, page 429 ff). In respect of costs:

Mr McMullan said there was no reason to change the insurance, which he felt was adequate for the Claimant’s needs. He thought he would have told the client that he was unsure whether the first CFA was enforceable or not, and therefore he had been asked to sign a fresh agreement. The fee earners in his firm had been trained as to what they had to say in respect of the check-list. Mr McMullan confirmed that there was no specific or separate retainer agreement with the Litigation Friend. She had stepped into the Claimant’s shoes as his Litigation Friend and was happy to carry on under the terms of the original CFA.

On 4 February 2004 a conference took place with counsel Mr Stephen Campbell in Birmingham. This was the first time that counsel had been instructed to advise in the case. Mr McMullan asked counsel to advise specifically whether he thought the client required a litigation friend. According to Mr McMullan’s contemporaneous attendance note (bundle tab 4, page 438) counsel felt, having read the papers:

On 9 March 2004 Dr H Leung of Lea Road Medical Practice Wolverhampton certified:

On 26 March 2004 Dr H Obi, of the same medical practice, confirmed:

Following the conference with counsel Mr McMullan wrote to Mrs Findley Clarke, on 6 February 2004 (bundle tab 4, page 443). In that letter Mrs Findley Clarke was informed:

After Mrs Lindley Clarke had been appointed Litigation Friend, Mr McMullan explained that he did not get her to sign any retainer documents on the Claimant’s behalf:

With regard to the statement in the letter of 6 February 2004 to Mrs Findley Clarke that she would be liable to pay the balance of the Defendant’s costs and the Claimant’s own disbursements, if they exceeded the indemnity limit of £50,000 in the insurance policy, Mr McMullan stated that this was prospective advice. The costs were very low at that point. Liability had not been in dispute since 13 August 2002. Proceedings were commenced on 2 April 2004, and following the admission of liability judgment was entered against then first Defendant with damages to be assessed limited to 80% on 31 January 2005. Directions for the assessment of damages were given on 31 March 2005 and the final order by consent was dated 25 June 2007.

In relation to capacity, Mr Mallalieu referred Mr McMullan to the Solicitors Code of Conduct 2007, which states in its guidance:

Mr McMullan was not aware that lack of capacity might terminate the contract. His understanding was that the firm had a binding CFA with the Claimant, and that the Litigation Friend would step into the Claimant’s shoes and take over conduct of the litigation. Counsel had not said anything about the validity of the CFA once the Litigation Friend took over.

After Joy Findley Clarke had agreed to become the Claimant’s Litigation Friend in March 2004 Mr McMullan wrote to her, on 4 May 2006, stating that he was required by Law Society Regulations to advise her of any revision to the firm’s terms of retainer and:

The letter indicated that most of the work would be carried out by Mr McMullan and his assistant. The hourly rates for various grades of fee earner were then set out:

The rates charged in both the first and the second CFA had a maximum rate of £175 for partners, consultants and solicitors. Those agreements state:

Mr Mallalieu queried why there had been a 40% increase in rates without any reason being given. Mr McMullan said that this was his firm’s standard client retainer letter. Mrs Findley Clarke had been asked to sign and return the letter but she did not do so. No copy of the letter was sent to the Claimant. The rates set out in the letter were the firm’s standard rates. The rates were normally revised in January but this had not been done every year.

Both the first and the second CFA contain provisions for paying the firm “if we end this agreement”. The firm were able to end the agreement if the client did not keep to the responsibilities set out in condition 2 of Schedule 2, or if the firm believed the Claimant was unlikely to win, in which case only the solicitors’ disbursements would be payable, including counsel’s fees. The firm could also end the agreement if the Claimant rejected advice about making a settlement with the Defendant, or if the Claimant did not pay the insurance premium when asked to do so. The letter written to Mrs Findley Clarke states:

John Hesketh was an assistant solicitor with Lucas McMullan Jacobs, he was admitted on 15 August 2001 having previously been employed as a trainee solicitor by the firm. He left the practice in December 2002 to pursue his career elsewhere. He was given the case of Lindsey Findley as part of his workload. He stated:

Following the judgment in English v Clipson Mr McMullan instructed the fee earners to contact all the TAG clients, give them the oral advice required under Regulation 4 of the CFA Regulations 2000, get them to re-sign the CFA agreement. Mr McMullan had prepared a specific set of papers for the client to sign:

In relation to taking instructions from the Claimant, Mr Hesketh stated:

In cross-examination Mr Hesketh described the Claimant as a “memorable client” both because of his personality and the difficulty in obtaining instructions. He said that it was difficult to get hold of the Claimant, who was not a sophisticated client. When advising him he had to use simple words to get the meaning across. Mr Hesketh thought that the Claimant understood “most of it”. He had to be succinct and not go into too much detail.

Mr Hesketh recalled that there was a check-list, he assumed that the one in the bundle was the same as that which he had used. He did not recall seeing any check-list signed by the Claimant.

With regard to the pro forma documents prepared by Mr McMullan, these could be amended by the individual fee earners to fit the particular case.

When going through the requisite advice with the Claimant, he did not touch upon the question of the two CFAs existing in the alternative.

Mr Hesketh felt that when he spoke to the Claimant, that the Claimant did understand what he was saying. He was able to take instructions from him, and the Claimant was able to give details of the accident. Mr Hesketh spent a lot more time on the phone to him than he generally did with other clients.

Mr Hesketh felt he would have told the Claimant about the costs consequences of Part 36 offers, but could not remember what he told him about the position if the firm failed to recover costs from the other side.

With regard to the missing documents, Mr Hesketh’s recollection was that the documents, once signed, would have been put in the back of the file. There would have been an attendance note and time recording. He could only assume that the documents were on the file in 2002 when he left the company.

Daniel Downes was an assistant solicitor with Lucas McMullan Jacobs, having joined the firm on 1 July 2002 as a para-legal. He entered into a training contract in June 2003, and qualified in January 2005. In July 2002 he was employed doing only personal injury work. All his case load consisted of claims referred to the firm under the TAG Scheme. Mr McMullan vetted the cases first, passing on those cases he thought were suitable for Mr Downes to handle.

There were regular meetings in the personal injury department to discuss topical issues. Following the judgment in English v Clipson there was great concern in the practice, and Mr McMullan gave instructions to all the fee earners in the personal injury department to get out each TAG file, contact the client and give him or her the oral advice required under the CFA Regulations 2000, and to follow that up by having them re-sign the CFA agreement. There was a training session, when Mr McMullan explained by reference to the CFA check-list, the advice that was required to be given to each client. He also prepared a standard letter to go out with the CFA papers, and the fee earners were instructed not to carry out any further work until such time as the client had been given the necessary oral advice and had re-signed the CFA.

Mr McMullan and Mr Hesketh gave their evidence truthfully and frankly, the evidence of Mr Downes is not controversial. The evidence does, however, raise a number of matters which must be taken into account in deciding the issues in this case. These include Mr McMullan’s comments in his attendance note on 13 July 2001 to the effect that the Claimant did not understand what he was being told; the fact that the check-list dated and signed 20 July 2001 was in fact signed by the Claimant in January 2003; the fact that there are no papers relating to the second CFA available; and the fact that Mr McMullan specifically asked counsel to advise in respect of a litigation friend, from which it must be inferred that he was aware in February 2004 of the possible requirement for a litigation friend.

Mr Mallalieu suggested that Mr McMullan had adopted the standard TAG procedure (as he was required to do) but that he had departed from it in respect of his own check-list and the giving of an oral explanation prior to the visit by the TAG representative. He suggested that the first time the Claimant saw the fact find and oral explanation sheet, which was said to provide the written explanation, was when the TAG representative visited him and obtained his signature.

Mr Mallalieu did not accept that a copy of the fact find and oral explanation sheet had been sent to the client, suggesting that there was no evidence to support that. However, Mr McMullan gave clear evidence to this effect (see paragraph 33 above). I do, therefore, accept that a copy of the fact find and oral explanation sheet was sent to the Claimant, together with the conditional fee check list. Mr Mallalieu’s supplemental submission is that the fact find and oral explanation sheet does not provide the requisite written information. He argues that there is a substantial inconsistency between the advice apparently given by reference to the fact find and oral explanation sheet and that set out in the CFA. The fact find and oral explanation sheet, signed by the Claimant on 20 July 2001 (bundle tab 3, 353 ff), states, so far as relevant:

The CFA itself, the relevant part of which I have set out at paragraphs 35 to 38 above, informs the client that the solicitors were unable to discuss other methods of financing the costs, because the Claimant had already “agreed to purchase a legal expenses insurance policy” and “had also agreed to fund the purchase of the legal expenses insurance … by a loan …” The CFA goes on to inform the Claimant that he is “contractually bound to purchase the legal expenses insurance policy” and it would therefore be inappropriate for the solicitor to discuss the suitability of the insurance product with the client, although he is entitled to obtain independent legal advice. In short, argues Mr Mallalieu, the client was told that he could not be given any of the advice or explanation he was entitled to. In fact the TAG insurance was not effected until 31 July 2001, eleven days after the CFA was signed by the Claimant. Mr Mallalieu relies on my decision in Richards v Davis, dated 25 November 2005, in which I found that the wording of the CFA (which was slightly different in that case) was no more than a device to get round the provisions of the Regulations.

Mr Mallalieu submits that in the absence of any evidence as to what took place when the TAG representative visited the Claimant, the court should conclude that the advice given was consistent with that set out in the CFA to which I have referred.

Mr Power relies upon the existence of the check list used by Mr McMullan which, he argues, covered the requirements of Regulation 4(2)(a)-(e). The Claimant was of no fixed abode at the time of his accident and was living rough. It was always extremely unlikely that he would have had insurance of any kind. Mr McMullan had asked the Claimant whether he had insurance, and was told quite emphatically that he had not. Mr McMullan also spoke to Mrs Findley Clarke to find out if the Claimant had insurance of any sort. He did not.

Mr Power suggests that the issue in July 2001 is the extent to which the Claimant’s solicitor is under an obligation, not just to deliver advice but to ensure that it is being understood by the client. He suggests that the test is one of reasonableness in deciding how far the solicitor needs to go in getting the information across to the client. He suggests that there is a group of people who are slow witted or not interested in the advice given in such circumstances, but they are quite capable of giving instructions and do not need a Litigation Friend. Oral advice was given twice, once by Mr McMullan and once by Mr Hesketh. Mr McMullan said that he “did my best”, Mr Hesketh said that he had to use simple words to get his meaning across. He thought that the Claimant had understood “most of it”. There was no evidence that the TAG representative did anything other than what was required of her. Mr Power submits that the solicitor does not have to guarantee that the Claimant has understood, even if the Claimant had not understood the position during the initial telephone conversation of 13 July 2001, at the subsequent meeting, on 20 January 2003 (after both CFA1 and CFA2 had been signed) Mr McMullan was satisfied that the Claimant did understand.

The Claimant accepts that there is a duty on solicitors to do all that was reasonably necessary to make sure that the Claimant understood. Mr Mallalieu submits that the duty goes further and does not accept that the Solicitors did enough. It was clear to the Solicitors that the Claimant had not understood at the initial interview and that they had not done enough to get the meaning across. The answer was therefore to appoint a Litigation Friend at a much earlier date. He submitted that the Solicitors have not complied with their Regulation 4 duty, because they have not done all that was reasonably necessary to enable the client to understand the implications of entering into a CFA.

Mr Power submits that it is possible to distinguish Richard v Davis from this case, one of the reasons being that it is not authority for the general proposition that the mere inclusion of paragraphs (j), (e) and (f)(i) and Schedule 2 of the CFA is automatically fatal to the standard TAG CFA. He argues that it is inconceivable that, if the mere inclusion of those paragraphs rendered every TAG CFA unenforceable, the point would not have been made in the light of the scrutiny and the detailed and comprehensive judicial analysis to which the TAG Scheme has been subject.

The fact is that the so called compliance issues were never tested in The Accident Group Test Cases (see Richards v Davis paragraph 11). Had they been so tested the matter would no doubt have gone to the Court of Appeal, and a definitive decision obtained. In the event there have been a few isolated TAG cases, some of which have settled before hearing. Other examples are Richards v Davis, Booth v Greens Transport Ltd, 20 August 2007, which was my judgment when sitting as a Recorder, and this case. It is not known how many other TAG cases settled as a result of the mediated agreement, nor how many cases are outstanding which have never settled.

The real question is whether or not Mr McMullan’s conditional fee check-list was sufficient, bearing in mind his evidence that the advice which he gave was more detailed than the topic set out in the check list, to comply with the requirements of Regulation 4. I accept Mr Power’s submission that there is no real issue concerning compliance with Regulation 4(2)(a) or (b) (advice concerning the circumstance in which the client pays his own legal costs and when the client can seek assessment of those costs). Similarly Mr McMullan does appear to have made appropriate enquiries as to whether the proceedings were insured under an existing contract of insurance.

A difficulty arises with Clause 5 of the check-list “my solicitor has discussed with me and I have been advised of other methods of financing the case”. This is directly contrary to what is said in the conditional fee agreement: “We were unable to discuss other methods of financing those costs …” A still greater difficulty is caused by Clause 6 of the check-list: “My solicitor has informed me why the insurance we have chosen is appropriate and the interest he has in recommending this policy of insurances that my solicitor is on the panel of The Accident Group Scheme”. This again cuts across what is said in the CFA: “… we do not believe that it would be appropriate for us to advise you as to [the TAG policy’s] suitability …”

Even if it is accepted, as I do, that the solicitors were under an obligation to use the TAG policy, this does not, in my judgment, meet the test laid down in Garrett v Halton Borough Council [2006] EWCA Civ 1017 at paragraph 94. The Solicitor’s obligation in Regulation 4(2)(e)(ii) is to inform the client, if he recommends a particular insurance contract, “whether he has an interest in doing so”. The obligation is not to inform the client whether he believes that he has an interest in doing so; it is to inform the client whether he has an interest in doing so in fact. This Regulation is concerned with client protection. The Court of appeal explained:

There are distinct parallels in the present case. The Claimant was told that the interest which Mr McMullan had in recommending the policy of insurance was that he was on the panel of The Accident Group Scheme and that he was obliged to use the TAG insurance. In my judgment, even if the Claimant had been fully able to understand the explanation which was being given to him, he would have been left with the same impression as Ms Garrett.

The question of the Solicitor’s interest has been further examined by the Court of Appeal in Tankard v John Fredricks Plastics Ltd & Other Cases [2008] EWCA Civ 1375. Sir Anthony Clarke MR, giving the judgment of the court, said:

With regard to disclosure of interest the Master of the Rolls said this:

In my judgment, applying the test suggested by Dyson LJ, a reasonable person would find the membership of a TAG panel and the obligation to use the TAG documentation and ATE policy constituted an interest which might affect the advice given by the solicitor. For the reasons which I have given, and, on the basis of what has been said by the Court of Appeal, I find that there has been a breach of Regulation 4(2)(d) and (e). The Claimant has been denied the opportunity to make an informed choice.

Mr Power argues that if there was any breach of Regulation 4, in respect of the first CFA, it was not material. He reminded the court correctly that the Parliamentary purpose of the legislation was to enhance access to justice, not to impede it. He accepts that the purpose of the Regulations was the protection of the client, see Garrett v Halton Borough Council [2006] EWCA Civ 1017 at 101. He further accepts that the question whether there has been substantial compliance, or a material departure from what was required should be determined without regard to the actual consequences for the client.

Mr Power seeks to distinguish this case from the facts in Garrett, because: (i) Mr McMullan did inform the Claimant that his firm was obliged, by its membership of the TAG panel only to recommend the TAG policy, and (ii) the written explanation in the check-list, to the effect that Mr McMullan recommended the TAG policy because the firm was a TAG panel member, amounted to significant factual distinctions. I have, however, already found that the oral and written explanations as to the solicitors’ interest in recommending the TAG policy were insufficient. Mr Power submits that once the decision is made, and the Claimant has contracted to purchase the insurance, the protection afforded by written details to the effect that the insurance was appropriate, or that the solicitor who recommended it may benefit from repeat referrals “is of little or no value”. He accepts that the protection consists of having the information necessary to make an informed decision. Once the decision is made the same information would cease to be of importance. The client can no longer decide that he does not want the insurance.

I cannot accept those submissions which are all based on the premise that the oral and written explanations which have been given are in fact sufficient. Had they been, there would have been no breach under those heads of the Regulations. Both the CFA and the fact find and oral explanation sheet have been signed by the Claimant to say that the advice contained in those documents has been received. That advice is, however, inconsistent.

Mr Mallalieu relies on Hollins v Russell [2003] EWCA Civ 718 as clarified in Garrett, submitting that the failures which I have described are clearly material. In his submission “total non compliance” cannot amount to “substantial compliance”.

I accept Mr Mallalieu’s submissions and find that there has been a breach of Regulation 4(2)(d) and (e) and that there has been a materially adverse effect upon the protection afforded to the client.

It is no part of Mr Mallalieu’s case that the Claimant lacked capacity prior to February 2004. It was on 4 February 2004 that the conference with Counsel took place, at which Counsel advised that a Litigation Friend was required. Since Mr McMullan had specifically asked Counsel to advise on this topic, it can be said with confidence, that, as at that date, both Mr McMullan and Counsel were of the view that the Claimant required a Litigation Friend. For the purpose of this judgment, therefore, I take that date as the date upon which the legal representatives were aware that the Claimant lacked capacity. The doctor’s letters of 9 and 26 March confirmed the position, and the Claimant’s sister was appointed the Litigation Friend. Mr McMullan did not enter into a separate retainer with Mrs Findley-Clarke, but simply carried on acting (see paragraph 56 above).

Mr Mallalieu argues that the effect of a party to a contract for services losing capacity, in circumstances where the other party is clearly aware of that loss of capacity, is to end the contract (for further services) with effect from the date of the lack of capacity. Mr McMullan when cross-examined said he was not aware that lack of capacity might terminate the contract. He thought that the Litigation Friend would step into the Claimant’s shoes and take over the conduct of the litigation. Mr Mallalieu relies on Yonge v Toynbee [1910] 1 QB 215 at 228 as authority for the proposition that the Claimant is no longer able to give instructions, and the contract is at that point frustrated. The contract having been frustrated, Mr Mallalieu accepts that the Litigation Friend has ability to contract on behalf of the Claimant, and could have entered into a new retainer with the solicitors.

Mr Mallalieu further relies on Treitel: Frustration and Force Majeure 2^nd Edition:

Mr Mallalieu goes on to submit that once the requirements of frustration are satisfied, the effect of the doctrine is to discharge the contract “forthwith without more and automatically” (see Treitel 15-002). Finally Mr Mallalieu points to 24.04 of the Guide to Professional Conduct of Solicitors 1999, which was current at the time of the Claimant’s incapacity, which, in answer to the question “what do I do if my client loses capacity in the course of the retainer?” states:

In relation to capacity Mr Power argues that whilst both The Guide to the Professional Conduct of Solicitors 1999 (at page 453) and The Solicitors Code of Conduct 2007 (rule 2, note 6(a)(iii)) state that a client’s mental incapacity will automatically terminate a retainer with a solicitor, no authority is cited in either publication for that proposition. He submits that what is said in those Codes is an over-simplification, both of Yonge v Toynbee and the law relating to contract and mental incapacity. He relies on Chitty on Contracts 29^th Edition, chapter 8 – personal incapacity. He seeks to argue that the contract for legal services was a contract for necessaries, and accordingly binding on the Claimant. As to the meaning of necessaries, Chitty states:

The authority cited for that proposition Imperial Loan Co Ltd v Stone, does not appear to have been cited in Yonge v Toynbee. Mr Power argues that Mr McMullan did not know that the Claimant lacked capacity prior to 4 February 2004.

Mr Power’s position is that the retainer between the Claimant and his solicitors was a contract for necessary services and was binding on the Claimant regardless of any mental incapacity on his part. Even if the contract was not a contract for necessaries, the retainer would be voidable at the option of the Claimant, but the Litigation Friend, Mrs Findley-Clarke, had ratified or affirmed the retainer as being in the Claimant’s best interests.

Mr Power then referred to Halsbury’s Laws Volume 44(1) Solicitor and Client at paragraph 107:

In relation to capacity, Mr Power relies on Halsbury’s Laws Volume 30 Mental Health, at paragraph 1390:

Mr Power also seeks support from the Practice Direction, issued by the Master of the Court of Protection on 9 August 1995, which states:

Mr Power submits that a Litigation Friend, as an officer of the court, has the same power to confirm a contract as a court does. Mr Power seeks to distinguish this case from Yonge v Toynbee, in that that case was an action for defamation which probably would not have qualified as “necessary” and would therefore have been voidable at the option of the client. In this case, however, he submits that it was necessary for the Claimant to recover damages for his injury for his own welfare, and he needed a solicitor to enable him to do so. Mr Power seeks to support this submission, by reference to Section 3 of the Sale of Goods Act 1979:

Mr Power submits that the court has to consider whether the solicitors did all that was reasonable to ensure that the Claimant understood. The court does not need to consider whether he did in fact understand. The Claimant cannot set up his mental state as a defence against having to pay his own solicitors. The question in Yonge v Toynbee was the solicitor’s authority to act. There was no consideration of the principles in Imperial Loan Co. In that case, which he submits is not authority for the proposition that solicitors could not recover from their client, the solicitors could enforce the retainer against the client if the legal services were necessaries. Actions for defamation may not be regarded as necessary, and therefore the contract may have been voidable.

Mr Power submits that a proper analysis of Drew v Nunn, The Imperial Loan Co v Stone and Yonge v Toynbee accords with the analysis set out in paragraphs 8-070 ff of Chitty on Contracts 29^th Edition.

Mr Power also seeks to rely on what was said by Bowen LJ in Rhodes v Swithenbank [1992] 22 QBD 577 at 579:

Mr Power argues that Mrs Findley-Clarke is in the same position as a next friend, and therefore had the authority of the court to bind the Claimant in all measures for the benefit of the Claimant in this litigation. This includes the decision to maintain the Claimant’s retainer with the Solicitors. It can be implied that she did so from her conduct in giving instruction to the Solicitors, in the knowledge and on the understanding that the Claimant had signed a CFA with the solicitors. Where the Litigation Friend is acting for a person under a disability, both the Litigation Friend and the person under a disability may be clients of the solicitor. In support of this proposition Mr Power relies on the Guide to Professional Conduct of Solicitors 1999 at page 246:

Mr Power suggests that the retainer may be with the Litigation Friend, or, in the particular circumstances of this case, with the Claimant who lacks capacity.

Although Mrs Findley-Clarke did not sign the letter of 4 May 2006, Mr Power suggests that this is evidence supporting his contention that Mrs Findley-Clarke accepted, by her conduct, that the CFA between the Solicitors and the Claimant was appropriate. The letter states:

The solicitors do not contend that the letter itself forms a CFA or a retainer. They rely on the conduct of Mrs Findley-Clarke as ratifying the second CFA.

Finally, Mr Power referred to Section 96 of the Mental Health Act 1983, which provides:

Mr Mallalieu does not dispute that following Imperial Loan Co, if a contract is entered into, and one party at the time lacks capacity, and the other party knew, then the agreement is voidable at the instance of the incapacitated person. All the authorities support this. The real issue is whether, on its face, a contract is entered into, and a person suffers supervening incapacity. What is the effect of that? He argues that the contract is frustrated because the Claimant cannot give instructions, (see Yonge v Toynbee). He argues that “necessaries” deals with whether the contract was properly formed, not the effect of subsequent lack of capacity.

Mr Mallalieu draws the court’s attention to Section 1(3) of the Law Reform (Frustrated Contracts) Act 1943, to the effect that if the contract between the Claimant and the Solicitors is terminated by the loss of capacity of the Claimant, then the Claimant may have a liability to his Solicitors for the period up to the frustration for reasonable costs relating to the value of the benefit received by virtue of this provision. Mr Mallalieu does not argue for a date earlier than 4 February 2004, but points out that this liability is subject to his point that the CFA is unenforceable in any event.

Mr Mallalieu argues that although Chitty says legal services may amount to “necessaries”, De Stacpool is not authority for that proposition. He submits that the parties did not regard the CFA as a contract for necessaries. He says that this would give rise to bad practice and would enable lawyers to sue their clients for their costs. In any event, whatever the nature of the contract, it was, he submits, determined by the Claimant’s supervening incapacity. It was therefore necessary for there to be a new agreement with a capable person, ie, the Litigation Friend.

With regard to Mr Power’s suggestion that the Mental Health Act gives the Litigation Friend power to validate retrospectively a contract, this is misconceived, since Section 96 of the Act gives that power to a Judge of the Court of Protection. I agree. That part of the 1983 Act deals with the management of property and affairs of patients by the Court of Protection. To the extent that Mrs Findley-Clarke may be an officer of the court by virtue of being the Claimant’s Litigation Friend, that is only in respect of the proceedings in the Queen’s Bench Division in this action.

For the reasons given above I find that the CFA with the Claimant came to an end as a result of his lack of capacity on 4 February 2004. Mr Mallalieu argues that where a party has no capacity to contract at the outset, capacity may be attained at a later stage, and a party may ratify the earlier contract. He accepts that a contract for necessaries may be enforceable in such circumstances, despite the lack of capacity. In this case, however, he submits, and I accept, the matter turns on what happens when a party with capacity has entered into a contract which provides for continuing mutual obligations, but then that party loses capacity to manage his own affairs. This is a situation covered by both Yonge v Toynbee and Drew v Nunn, and which is spelt out by the Law Society in its guidance. I find, therefore, that as from 4 February 2004 the Claimant was no longer able to give instructions, and the contract was at that point frustrated. The question whether the legal services amount to “necessaries” cannot in my judgment save the contract.

The question then arises whether and to what extent the Litigation Friend can ratify or adopt the retainer. The simple and most obvious solution, which was not adopted, would have been to enter into a new CFA with the Litigation Friend. This could perhaps even have been made retrospective. An additional difficulty, as at February 2004, was that TAG had already gone into administration. There is no evidence as to whether this fact had any bearing on the Solicitor’s failure to enter into a new CFA with the Litigation Friend.

Mr Mallalieu goes so far as to accept that if there was an implied retainer with the Litigation Friend by virtue of her conduct, any such retainer could at most only have been on the same terms as those agreed to by the Claimant. It seems to me that that must be the correct approach, since the terms of the implied retainer would then represent the obvious but unexpressed intention of the parties, see Hamlyn & Co v Wood [1891] 2 QB 488, 494.

It may well be that Mrs Findley-Clarke thought (she has not given evidence) that she was bound by the same terms as those in the CFA entered into by the Claimant. The letter of 4 May 2006 makes it clear that the same terms apply (apart from a change in hourly rates and some additional matters). Mr Mallalieu submits that any implied retainer would have had to comply, at the time it was entered into, with the requirements of Section 58 of the Courts and Legal Services Act 1990, and with the Conditional Fee Agreement Regulations 2000. There is, however, no written retainer with the Litigation Friend, she did not sign the letter of 4 May 2006, neither is there any evidence of compliance with the Regulations unless it can be said that the explanation given on 20 January 2003, when Mr McMullan visited Wolverhampton, could amount to sufficient oral explanation. The documents relied on by Mr McMullan as the written explanation were produced on that day and a copy was signed by the Claimant. Mr McMullan stated that neither the Claimant nor his sister had any questions about the CFA and were satisfied with it. Regulation 4 of the 2000 Regulations does not impose any particular time at which the necessary information must be given, merely stating:

Regulation 5(1) of the 2000 Regulations provides:

The second CFA was signed by the client and the legal representative. There is no requirement in the Regulations for a Litigation Friend subsequently purporting to ratify such an agreement to also have to sign. The difficulty which arises, however, is that the agreement with the Claimant had come to an end because of his lack of capacity. It was necessary for the Litigation Friend to enter into a new CFA with the solicitors. As things stand at the moment there is no need for a CFA to be signed by the client. As at 4 May 2004 the CFA Regulations 2000 did require such a signature. Mr Mallalieu’s submission that any implied retainer would have to comply with the requirements of the 1990 Act and the 2000 Regulations is correct.

If I were dealing with a situation where the retainer between solicitor and client was not a CFA, it would be entirely possible for the Litigation Friend to ratify that retainer by her conduct (see Blyth v Fladgate [1891] 1 Ch 337). In Adams v London Improved Motor Co Builders Ltd [1921] 1 KB 495 Lord Justice Bankes stated:

Lord Justice Atkin said:

On the facts of this case, I conclude that Mrs Findley-Clarke retained the Solicitors on the written terms of the second CFA. As such there is no difficulty in finding that Mrs Findley-Clarke was the client of the Solicitors and that she was liable to them for their costs.

I am satisfied from the conduct of Mrs Findley-Clarke that she had accepted what the Solicitors had told her in the letter of 6 February 2004. I find, therefore, that Mrs Findley-Clarke instructed the Solicitors on the same terms as the second CFA. This, of course, does not answer the question whether or not CFA2 was enforceable. This is dealt with below under Issues 10 and 11.

Given my finding that the Litigation Friend ratified the second CFA, the Defendant’s primary case, that there cannot be a variation of any retainer with the Claimant since he did not have capacity to enter into such a variation, goes. Mr Mallalieu, therefore, relies on the fact that the hourly rates set out in the letter of 4 May 2006 are inconsistent with the terms of the CFA concerning increase in those hourly rates, where the Claimant was clearly told:

The top rate set out in both the first and the second CFA was £175 per hour. Both parties had calculated the increase in the RPI up to May 2006, the Claimant calculating that the appropriate figure was £199 per hour, and the Defendant £196 per hour. It would be a matter for the Costs Judge on detailed assessment to decide exactly what hourly rate to allow, but given the finding that the Litigation Friend has ratified the second CFA the term which I have quoted above would clearly apply.

Mr Mallalieu argues that, at most, the letter can only amount to a unilateral attempt to vary the contract which is unsupported by any consideration flowing from the Claimant’s Solicitor. He argues that the Claimant cannot be bound to such a variation and is not liable for any increase in the hourly rates exceeding the RPI which had been notified to him in writing. Mr Power says no more than that the Litigation Friend could have insisted on limiting the increase to the RPI figure. In those circumstances Mr Mallalieu’s submission appears to be incontrovertible and I accept it.

Mr Mallalieu argues that if the Claimant is putting forward the letter, which was, at the time it was sent, the firm’s standard retainer letter, as in some way altering the terms of the CFA, this is an attempt at a unilateral variation by the Solicitor without any consideration flowing. It could not therefore bind the Claimant. The Claimant does not argue that this letter is either a retainer letter or a CFA. It was never signed by Mrs Findley-Clarke. It follows, therefore, that the terms which apply to this retainer are those set out in the second CFA (provided it is enforceable).

In my judgment, provided that the second CFA is enforceable, the only effect of the letter of 4 May 2006 would be to increase the hourly rates in accordance with the RPI from 4 May 2006.

For the avoidance of doubt I accept that the Claimant signed a second CFA some time between 1 September 2002 and 4 December 2002. I further accept that the CFA was in the same form as that exhibited in the case of Mr Hull and that the other documents involved (the letter enclosing “another CFA and client care letter” and the CFA check-list) were also sent to the Claimant. The CFA was not intended to be retrospective. Mr Power accepts that if the first CFA is unenforceable any costs recoverable under it would be lost.

Mr Mallalieu’s position is that there cannot be two retainers, and therefore the first CFA must have come to an end when the second CFA was signed. The first CFA contained no provision as to costs if the agreement was terminated by the Solicitors for their own reasons.

Mr Power’s position is that if the first CFA is enforceable, the second CFA is of no effect and the parties respective obligations continued unaltered. The signing of the second CFA would not have altered the party’s obligations at all under the first CFA, and furthermore there would have been no consideration for the second CFA. If the first CFA is unenforceable by either party Mr Power submits there is nothing wrong with entering into a second CFA. In relation to CFA2 Mr Power relies on paragraphs 8 and 9 of the fact find and oral explanation sheet and paragraph 5 of the check-list.

If the first CFA was enforceable the question of consideration for the second CFA would arise. Mr Mallalieu argues that a promise by a party to perform its existing obligations is sufficient consideration. Mr Power argues that there needs to be an additional factor in order to establish consideration, but he found himself arguing this as part of his submission that the second CFA did not terminate the first. The matter is, in my view, put beyond doubt by the decision in Williams v Roffey Brothers and Nicholls (Contractors) Ltd [1991] 1 QB 1, where the court stated:

The judgment in English v Clipson had raised a doubt in the minds of claimant’s solicitors as to the validity of CFAs entered into where the required information had been given by a TAG representative. If that argument was right there was a real danger that the first CFA would be unenforceable. Leaving aside for the moment whether the second CFA complied with the requirements of the CFA Regulations 2000, the Claimant agreed to enter into a second CFA on the same terms as the first in return for the Solicitor’s promise to continue acting on his behalf.

The court in Williams v Roffey also stated:

The bargaining powers of the parties in this case are certainly unequal, but whilst I accept Mr Mallalieu’s argument that there was consideration for the second CFA, I reject his submission that it was not their joint intention that the agreement should take effect in accordance with its terms.

In any event if I am right in my finding that the first CFA is unenforceable, there is clearly consideration for the second CFA.

I find that the mere signing of the second CFA does not of itself terminate the first CFA. There seems no reason why the Solicitors should not take the sensible step, being aware of the judgment in English v Clipson, of entering into a second agreement as a safety measure against the possibility that the first agreement might be found to be unenforceable (as indeed it has been).

Having decided that the second CFA was entered into by the Claimant, and that there was consideration for the agreement, whether the first CFA was enforceable or not, the question then arises whether the solicitors have done enough to show compliance with Regulation 4. Unfortunately the relevant papers are no longer available, and there is no record of what was said. Mr Hesketh accepted that he had given no explanation of the effect of the second CFA on the first CFA. He accepted that he was unlikely to have touched upon this, either orally or in writing.

With regard to the obligation under Regulation 4(2)(d) Mr Power submits that there was at the time of the second CFA already a binding contract of ATE insurance. The contract of insurance was unaffected by any defect in the first CFA. The insurance was incepted on or about 31 July 2001, so that the assertions at paragraphs (j), (e) and (f)(i) and Schedule 2 of the CFA to the effect that the Claimant was a party to a binding contract of insurance were now true. Mr Power therefore argues that the Solicitors were therefore not then under the obligations imposed by Regulation 4(2)(e)(i) or (ii). The evidence is that advice regarding insurance was given, in accordance with Point 6 of the check-list.

Mr Mallalieu argues that there was no attempt to cure the failure to disclose the interest in that prior recommendation of the TAG policy, when the second CFA was entered into. He argues that it was vital that any defects in the advice that should have been given in the first place, were rectified. He relies on the judgment of Waller LJ at paragraph 61 to 63 of Jones v Wrexham BC [2007] EWCA Civ 1356 to the effect that Regulation 4(2)(c)(d) and (e) apply whether or not there was pre-existing insurance. He argues that the Claimant was not in a position to make an informed choice.

Waller LJ said this:

Mr Power sets out in his skeleton the argument that the judgment of Waller LJ was obiter, and is not binding, and is furthermore wrong for the following reasons:

He submits that at paragraphs 60 to 62 of Jones Waller LJ is contravening the intention of Parliament.

The second CFA suffers from many of the same defects as the first CFA. I accept that Mr Hesketh did discuss with the Claimant the matters set out in the check list. The inconsistency with the TAG CFA: “we are unable to discuss other methods of financing those costs …” and “… we do not believe that it would be appropriate for us to advise you as to [the TAG policy’s] suitability …” have now become understandable statements because of the existence of the loan agreement and TAG policy. The fact remains, however, that the Claimant has never been given the explanation to which he is entitled under Regulation 4(2)(e), and in particular in respect of the solicitor’s interest.

Although I accept that Waller LJ was speaking obiter at paragraphs 59 to 66 of Jones v Wrexham BC, I am not persuaded that he was wrong in what he said. It cannot, in my judgment, be right for solicitors to lead a client into an agreement, in which he is not allowed an informed choice in respect of methods of financing the litigation, and then sometime later lead the client into a second agreement and say, in effect: “We do not need to give you the information required by the Regulation, because you already have an adequate policy of insurance.” Accordingly, I find that there has been a breach of Regulation 4(2)(d) and (e) in respect of the second CFA.

Mr Power argues that if there is a breach it is not material. He argues that the purpose of having information in writing about the solicitor’s interest in the TAG policy was to ensure that the Claimant had sufficient information to enable him to make an informed choice about whether or not to proceed with the purchase of the TAG policy at the time the insurance was entered into. Once there was a concluded contract of insurance, that information was of no value and any failure to provide it is not material.

The question to be asked is:

That mischief had already taken place in relation to the first CFA. Although the Claimant was entitled to have a proper explanation in relation to the insurance and the Solicitor’s interest in recommending it, the fact that he did not get it does not, in my judgment, in relation to the second CFA have a materially adverse effect on the protection afforded to the client, who had in place an existing policy of insurance for which he was, and is, still liable to pay the premium. So far as the administration of justice is concerned, the Solicitors were faced with a difficult client and became involved with TAG, which was the subject of constant challenges in the courts, before going into administration. The Solicitors sensibly attempted to overcome their perceived difficulties by entering into a second CFA, and eventually found themselves unsupported by TAG, which had ceased to exist. Nonetheless, they persevered with the case and obtained a good settlement for the Claimant. In those circumstances I cannot say that there has been any materially adverse effect on the administration of justice.

I have already decided that Mrs Findley-Clarke entered into an implied retainer with the Solicitors on the same terms as the second CFA. She did this in February 2004. That retainer, however, being on a conditional fee basis, has to be in writing and signed by Mrs Findley Clarke. The CFA was in writing at the time it was signed by the Claimant, and Mrs Findley-Clarke had received and understood the oral and written explanations in respect of it on 20 January 2003. By February 2004 the ATE insurance had already been in place for some time, and the Solicitors no longer had any discloseable interest since TAG had gone into administration. They were receiving no more referrals from that company. The only defect in the CFA between the Solicitors and Mrs Findley-Clarke is, in my judgment, the fact that it was not signed.

In his powerful dissenting judgment in Crane v Cannons Leisure [2007] EWCA Civ 1352, Lord Justice Maurice Kay indicated that he would have upheld the Master’s decision to treat a costs draftsman’s fee as a disbursement, and not allow a success fee in respect of it. He continued:

In my judgment it would certainly be unjust if these Solicitors were deprived of their reasonable costs because of the lack of signature of the second CFA by Mrs Findley-Clarke. That breach of the Regulations does not have a materially adverse effect on the protection afforded to her as a client, nor upon the administration of justice. I should regard it as adversely affecting the administration of justice if the Defendant in these proceedings was able to walk away without having to pay any costs to the Claimant’s Solicitors.

Issue 12 raises the question whether the Claimant’s liability for his own disbursements was limited by reference to the extent of his legal expenses insurance cover and his potential liability for adverse costs. The implication being that, if the liability was so limited, the operation of the indemnity principle would mean that the Defendant would not be liable for any more than the Claimant. Mr Mallalieu argues that it was implicit from the terms of the insurance policy that the disbursements would not exceed £50,000.

In the client care letter dated 18 July 2001 the Claimant was told:

At condition 5 of the CFA the Claimant is informed:

Paragraph I of the CFA informs the client:

Mr Mallalieu’s point is that there is no evidence that the Claimant was informed at any stage of his potential costs exposure (in excess of £50,000) either in relation to his own costs or to the other side’s costs. In short there is no evidence to suggest that the true nature of his potential liability was ever explained to him. Thus, Mr Mallalieu argues that neither the CFA nor the client care letter gave the Claimant a proper explanation of the circumstances in which he might become personally liable. He submits that any reasonable client would, in these circumstances, be left with the entirely mistaken understanding of the extent of his liability for disbursements, or of his potential liability. Given that the Claimant’s own disbursements, including VAT, amount to £112,583.35, Mr Mallalieu argues that there has been a breach of Regulations 2(1)(b) and/or 4(2)(a) and that the CFA is, therefore, unenforceable.

In the alternative, he argues that a reasonable claimant would have understood that he faced no significant personal liability for disbursements, other than what would be covered by his insurance policy. Mr Mallalieu suggests, therefore, that as between the client and his solicitor, the Claimant’s liability for his own disbursements was capped at a maximum of £50,000, a figure which could not be exceeded unless and until the Claimant’s Solicitor advised him that this was to be exceeded, and the Claimant agreed.

Mr Mallalieu does not argue for a cap lower than £50,000, in spite of the fact that the insurance was intended to cover adverse costs, as well as own disbursements. His position is that any claim for disbursements above £50,000 is a claim for sums for which the Claimant had no personal liability, and is a breach of the indemnity principle.

Mr Power for his part argues that at the time the contract of insurance was entered into, Mr McMullan considered that the insurance cover of £50,000 was reasonable. He says that there is no evidence that, either at that time, or subsequently, the level of cover was inappropriate, since there was never anything other than a remote risk that the £50,000 might prove insufficient. The level of disbursements incurred, up to the date of judgment on liability on 31 January 2005, amounted to £2,952.38. In any event, from that date onwards the Claimant’s risk of not succeeding was even lower than it had been before (bearing in mind that he was a passenger at the time of the collision).

By the time the revised schedule of loss of £2.6 million was served, on 30 September 2006, disbursements had risen to £14,851.38. By this time there had been a payment into court by the Defendant of £277,170.

The Claimant’s only risk, which again was remote, was that the payment in would not be beaten. By 16 May 2007, when a Part 36 offer of £850,000 was made, disbursements amounted to approximately £23,500. There was never any serious risk that any liability the Claimant might have had would not have been covered by his insurance policy. Shortly after this, the Defendant offered to settle for £1 million. The approval hearing took place on 25 June 2007.

In my judgment the possibility of the Claimant losing this action was never anything other than remote. The high point of the risk was after the offer of £850,000, on 16 May 2007. Experienced Leading Counsel had been instructed, and a good settlement was achieved for the Claimant. Although there was a theoretical possibility that the Claimant might be left with a personal liability for his own disbursements and/or adverse costs, I do not regard the failure by the Solicitors to go into that level of detail as a breach of the Regulations. If, however, I am wrong about that, I am not persuaded that that breach has had any materially adverse effect, either on the protection afforded to the client, or on the administration of justice. Nor am I of the view that the Claimant’s liability for disbursements was in some way capped because the Solicitors did not spell out to him the theoretical possibility that he might have an open ended liability.

I decide the issues as follows:

The conditional fee agreement dated 20 July 2001 is unenforceable, in that the Claimant’s Solicitor failed to provide any adequate oral explanation of the matters required by Regulation 4 of the Conditional Fee Agreements Regulations 2000.

The CFA is unenforceable because of a breach of Regulation 4(d) and (e) of the 2000 Regulations, in that the Claimant’s Solicitor failed to provide the Claimant with the information required by those Regulations, namely whether other methods of financing the costs were available, and whether the solicitor considered any particular insurance product was appropriate, and if so his reason for doing so.

The Claimant’s Solicitor did have a disclosable interest in the TAG policy, in the sense required by Regulation 4(2)(e)(ii) of the 2000 Regulations. The CFA is unenforceable because the Claimant’s Solicitor failed to disclose that interest adequately before the Claimant entered into the CFA.

The CFA with the Claimant came to an end as a result of his lack of capacity on 4 February 2004.

The Litigation Friend by her conduct instructed the Claimants’ Solicitors on the same terms as the second CFA. The oral and written explanation given to the Claimant on 28 January 2003 was also given to and understood by the Litigation Friend.

The question whether the retainer between the Litigation Friend and the Solicitors is one which complies with Section 58 of the Courts and Legal Services Act 1990 depends upon the outcome of Issues 10 and 11 below dealing with the second CFA.

Subject to the second CFA proving to be enforceable the Claimant has a liability to his solicitor for the period up to 4 February 2004 for reasonable costs pursuant to Section 1(3) of the Law Reform (Frustrated Contracts) Act 1943.

The letter of 4 May 2006 can only be relied on to increase the hourly rates recoverable by reference to the Retail Prices Index from 4 May 2006.

The letter does not amount to any wider variation of the terms of the retainer as set out in CFA2, save to the extent that the hourly rates may be increased by reference to RPI. The varied contract is binding on the Litigation Friend so as to allow the recovery of fees and expenses between the parties at rates no higher than those calculated by reference to the increase in RPI.

The Claimant did enter into a second CFA in the autumn of 2002.

The second CFA does not comply with the Regulations, in that no adequate explanation was given to the Claimant in respect of the TAG ATE insurance, or the Solicitor’s interest in recommending it. Those breaches, however, have not had a materially adverse effect on the protection afforded to the client, or on the administration of justice. Mrs Findley-Clarke instructed the Solicitors on the same terms as those in the second CFA. There was a breach of the Regulations in that the second CFA was not signed by the Litigation Friend. For the reasons given that breach has not had a materially adverse effect on the protection afforded to the client, or on the administration of justice.

The issue of undue influence was not pursued.

The first CFA was not terminated when the second CFA was entered into. The Claimant accepts that if the second CFA is effective, and the first CFA is unenforceable, no costs are payable under the first CFA.

The Claimant’s liability for his own disbursements was not limited by reference to the extent of his legal expenses insurance cover. He is accordingly able to recover the full amount of the disbursements which are reasonable and proportionate.

If the Solicitor’s failure to explain to the client any potential liability for his own and/or adverse costs in excess of the limits of the legal expenses insurance policy amounts to a breach of Regulation 2(1)(b) and/or Regulation 4(2)(a) (which I do not find), that breach does not have any materially adverse effect on the protection afforded to the Claimant, or on the administration of justice.